INSIGHT: R&D will suffer despite stimulus packages

?xml:namespace>LONDON (ICISnews)--Cash flows are much reduced and the pressure to contain costs is huge but most chemical companies know that they cut back on research and innovation at their peril.

Encouragingly, some firms have reinforced the research and development (R&D) message stressing that spending will be maintained in this downturn. Some have said spending will be increased. This is an innovation-led business. New products drive superior growth. The statistics speak for themselves.

But take a step back and it is clear that research and innovation will suffer with the global recession. Companies across many sectors will cut back when times get particularly hard. Some may have to. The decline in investment could extend to government-inspired schemes.

A report compiled from a questionnaire sent to all 30 Organisation for Economic Co-operation and Development (OECD) member countries highlights the challenges facing research in this depressed economic environment. It warns of the impact of the cuts on economies that have over decades become much more innovation and service oriented.

It stresses that innovation will be one of the keys to emerging from the downturn and putting countries back on a path to sustainable - and smarter - growth.

Governments have incorporated measures to strengthen innovation in the stimulus packages they devised to outrun the slump. The OECD stresses that such stimuli needs to be well-directed. It warns against support for structurally ailing businesses and industries.

The data show that governments have promised a great deal to help buoy their battered economies. The OECD says it will continue to monitor the impact of these measures.

The EU has urged its member states to increase planned investments in education and R&D and consider ways to increase private sector R&D investments, for example, by providing fiscal incentives, grants and/or subsidies.

As just one European example, Germany has pledged €900m ($1.3bn) for R&D in small and medium-sized enterprises (SMEs) in 2009 and 2010 and a €500m expenditure is intended to foster the development of hybrid and other clean car technologies.

The US plans to increase employment of scientists and is making R&D investments. Significant stimulus packages have been announced with an increase in funding for science agencies. The National Science Foundation (NSF) has been granted $3bn and the Department of Energy’s Office of Science $1.6bn. Both grants include monies for research into environmental - or greener - technologies The National Institutes of Health (NIH) will receive $10bn.

Japan has said it will maintain its existing public R&D support.

But the evidence suggests that the crisis has already begun to affect innovation.

Historically, business R&D expenditure and patent filings have moved in parallel with GDP, the OECD says, slowing markedly during the economic downturns of the early 1990s and of the early 2000s. Data on trademark filings show that the business cycle is affecting a wide range of innovation, it says.

So the picture is mixed: stimulus and a potentially higher innovation expenditure on the one hand; but a general decline in spending on the other.

Those that are able to keep up the pace, or raise the focus on innovation, have a good chance of gaining ground when the turnaround takes hold.

At the national level there is clear evidence that increased innovation spending by Finland at the start of the 1990s and South Korea at the end of that decade helped put both economies on a stronger footing.

At the corporate level, well directed innovation spending will give companies the new products and formulations that will help lift growth coming out of the downturn.

To be able to grow faster sooner, and by doing so capture greater market share, is a goal worth pursuing.